January 15, 2019
One of the most controversial provisions of the 2017 Tax Cuts and Jobs Act (TCJA) was the limit it placed on state and local tax (SALT) deductions. The TCJA capped the deduction on combined payments for state and local property, sales, and income taxes at $10,000 beginning in the 2018 tax year.
According to the Joint Committee on Taxation, the SALT deduction cost the government $100.9 billion in potential 2017 tax revenue. SALT deduction costs are estimated to drop to $36.6 billion in 2018. It’s a large part of the tax revenue increase that paid for the corresponding tax cuts.
Many taxpayers won’t be affected by the SALT changes. However, people in states with high taxes and high property values can easily reach $10,000 from either property taxes or state taxes alone.
How do you know if you’ll be affected? Check Schedule A on last year’s tax return. If you entered more than $10,000 on line 5d and your tax status hasn’t significantly changed, you’ll probably pay more if you itemize.
How can you avoid the SALT cap? You can move to a lower tax state – but for many taxpayers, that’s not a practical solution.
The intent of the SALT deduction cap – and the whole TCJA – was to simplify taxes by encouraging people to take the standard deduction instead of itemizing. However, the phase-out limit on total itemized deductions was repealed by TCJA. For most Americans, the best path is to find other deductions to compensate for SALT deduction losses.
Charitable contributions are the best bet. The TCJA raised the charitable deduction limit from 50% of your adjusted gross income (AGI) to 60% – making charitable contributions one of the few itemized deductions that increased under TCJA.
Granted, few people can afford giving 60% of their AGI to charity. However, you could consider “bundling” charitable deductions to save in future years. Save up two- or three-year’s worth of contributions and make them in one future year to make itemizing feasible that year.
High tax states were attempting a workaround that involved state-created charities. By making qualified contributions to these charities, you would receive a state income tax credit – lowering state taxes and undercutting the SALT cap. Follow-up regulations from the Treasury Department rendered this moot by reducing the charitable contribution deduction by the amount of the tax credit.
If you’re suitably wealthy, you can avoid the SALT cap through the use of non-grantor trusts. Let’s assume you have a multimillion-dollar home and owe $30,000 in property taxes. You can split the property into three separate non-grantor trusts, with each trust receiving the maximum $10,000 exemption.
To qualify, the trusts must be generating income somehow, such as renting the property or placing securities that pay dividends in the trust. Other rules and restrictions apply.
Unfortunately, there aren’t any methods for people with modest incomes but high property tax values to avoid the SALT deduction cap. You may have to give in to the original intent of the TCJA. At $12,000 for single taxpayers and $24,000 for couples filing jointly, the standard deduction might be best for you.
The SALT tax deduction is intended to sunset after 2026 unless Congress acts to make it permanent. However, it’s equally likely to be modified or eliminated entirely before then – especially if there’s a radical change in election results between now and 2026. Perhaps your best bet to avoid the SALT tax cap in future tax years is to demand that it be changed, or demand that your state find an IRS-approved workaround.